2016 (5) TMI 412 - AT - Income Tax

Tribunal directs expense apportionment & upholds arrear salary treatment as income application under section 11(1)

The Tribunal directed the Assessing Officer to apportion common expenses between income segments based on the ratio of direct expenses for the assessment ... Apportionment of common expenses/indirect expenses between section 10(23A) segment and section 11 segment in a rational manner - Held that:- On perusal of the scrutiny assessment orders framed u/s. 143(3) of the Act by the ld.AO for the A.Ys 2010-11, 2011-12 & 2012-13, it is seen that both the revenue as well as the assessee institution had arrived at a consensus with regard to apportionment of common expenses/indirect expenses in the ratio of direct expenses incurred by section 10(23A) and section 11 segments. We find that both the revenue and assessee had tried to resolve this ongoing dispute by arriving at a consensus. Hence, by placing reliance on subsequent assessment orders passed for the A.ys 2010- 11, 2011-12 & 2012-13, we deem it fit and appropriate to follow the same as rationale for apportionment of common expenses/indirect expenses and accordingly, direct the ld.AO to follow the same for this assessment year also, which would resolve the dispute under appeal before us. - Decided in favour of revenue for statistical purpose. Provisions for arrear salary as application of income - Held that:- It is not in dispute that the assessee institution is following the mercantile system of accounting. We find that the assessee had provided for provision of salary arrears in its books based on the recommendations of the 6th Pay Commission, which got crystallised somewhere in February 2009 and treated the same as an ascertained liability by providing in its books of account. The assessee claimed the same as an application of income u/s. 11(1) of the Act. We agree with the arguments of the ld.AR that payment of salary arrears in 3 yearly installments commencing from Ays. 2009-10 to 2011-12 does not matter as far as the applicability of application of income u/s. 11(1) especially when the assessee is following the mercantile system of accounting. In view of aforesaid finding, we find no infirmity in the impugned order of the ld.CIT(A) in this regard. - Decided against revenue Issues Involved:1. Apportionment of common expenses between income exempt under section 10(23A) and section 11(1) of the Income-tax Act, 1961.2. Treatment of provision for arrear salary as application of income.Detailed Analysis:1. Apportionment of Common Expenses:Facts:The Institute of Cost Accountants of India (ICWAI) is a charitable institution established under the Cost and Works Accountants Act, 1959. It is exempt from income tax under sections 10(23A) and 11(1) of the Income-tax Act, 1961. The ICWAI categorized its income and expenses into those exempt under section 10(23A) and those under section 11(1). During the assessment, the Assessing Officer (AO) apportioned common expenses between these segments based on the gross receipts ratio, which the ICWAI contested.Assessment Proceedings:The AO determined a ratio of 10.21:1 for income under sections 10(23A) and 11(1) and allocated common expenses accordingly. The ICWAI argued that all expenses were for fulfilling its educational objectives and should be treated as applications of income under section 11(1)(a). The AO's method was seen as treating the ICWAI like a commercial organization.First Appeal:The Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the ICWAI, stating that the AO's allocation lacked legal or accounting basis and directed that all expenses be treated as applications of income under section 11.Tribunal's Decision:The Tribunal noted that in subsequent assessment years (2010-11, 2011-12, and 2012-13), both the revenue and the ICWAI agreed to apportion common expenses based on the ratio of direct expenses incurred by each segment. The Tribunal directed the AO to follow this method for the assessment year 2009-10 as well, allowing the revenue's appeal for statistical purposes.2. Treatment of Provision for Arrear Salary:Facts:During the assessment, the AO questioned a provision of Rs. 2,90,19,471 made for arrear salaries. The ICWAI explained that this liability was determined in a Council meeting and provided for in the accounts for FY 2008-09, to be paid over three financial years.Assessment Proceedings:The AO disallowed the provision, considering it an unascertained liability not based on a scientific method. The ICWAI contended that the liability was ascertained based on past records and had been paid out in subsequent years.First Appeal:The CIT(A) accepted the ICWAI's explanation, noting that the liability was ascertained and disbursed before the assessment's completion. The CIT(A) directed the AO to allow the provision as an application of income under section 11(1).Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, agreeing that the provision was an ascertained liability under the mercantile system of accounting and should be treated as an application of income under section 11(1). The revenue's appeal on this ground was dismissed.Conclusion:The Tribunal's order partially allowed the revenue's appeal for statistical purposes regarding the apportionment of common expenses and dismissed the appeal concerning the provision for arrear salary. The decision emphasized a rational approach to expense apportionment and recognized the legitimacy of the ICWAI's accounting practices.